<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File No. 1-14778
ENDOREX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1505029
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
28101 BALLARD DRIVE, SUITE F, LAKE FOREST, IL 60045
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (847) 573-8990
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
At November 13, 2000, 12,741,858 shares of the registrant's common stock (par
value, $.001 per share) were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30 December 31
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 10,337,263 $ 4,995,906
Marketable securities - available for sale 3,015,443 3,547,847
Receivable - option sale 250,000
Prepaid expenses 177,346 102,546
------------ ------------
Total current assets 13,780,052 8,646,299
Leasehold improvements and equipment,
net of accumulated amortization of $761,358 388,870 448,951
Patent issuance costs, net of accumulated
amortization of $9,940 240,818 176,875
------------ ------------
TOTAL ASSETS $ 14,409,740 $ 9,272,125
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 327,394 $ 496,889
Deferred Income-Sale of Option 250,000
Accrued compensation 131,094 184,508
Due to joint ventures 1,826,001 942,333
Current portion of line of credit 112,698 110,342
------------ ------------
Total current liabilities 2,647,187 1,734,072
Long-term liabilities:
Long-term portion of line of credit 235,620 281,899
------------ ------------
Total long-term liabilities 235,620 2,015,971
------------ ------------
Total Liabilities 2,882,807 2,015,971
Series C exchangeable convertible preferred stock,
$.05 par value. Authorized 200,000 shares; 91,218
issued and outstanding at liquidation value 9,505,034 9,027,012
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
4,600,000 shares; none issued and outstanding -- --
Series B convertible preferred stock,
$.05 par value. Authorized 200,000 shares;
92,973 issued & outstanding at liquidation value 9,854,122 9,297,300
Common stock, $.001 par value. Authorized
50,000,000 shares; 12,860,500 issued,
and 12,741,858outstanding 12,861 10,878
Additional paid-in capital 40,752,382 33,659,131
Unearned compensation (21,902) --
Deficit accumulated during the development stage (48,131,539) (44,294,417)
Unrealized gain/(loss) on marketable securities (275) --
------------ ------------
2,465,649 (1,327,108)
Less:
Treasury stock, at cost, 118,642 shares (443,750) (443,750)
------------ ------------
Total Stockholders' Equity 2,021,899 (1,770,858)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,409,740 $ 9,272,125
============ ============
See accompanying condensed notes to financial statements.
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Nine Months February 15, 1985
Ended September 30, (date of inception)
2000 1999 to September 30, 2000
<S> <C> <C> <C>
Revenue:
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 673,044 1,358,941 14,549,307
General and
administrative 1,473,260 2,576,567 12,443,537
----------- ----------- ------------
Total operating expenses 2,146,304 3,935,508 26,979,013
----------- ----------- ------------
Loss from operations (2,146,304) (3,935,508) (27,079,013)
Equity losses in
joint ventures (2,201,706) (1,984,431) (22,165,588)
Other income -- -- 5,302
Interest income 549,527 370,365 2,844,042
Interest expense (38,637) (38,338) (300,057)
----------- ----------- ------------
Net loss (3,837,120) (5,587,912) (46,595,315)
Preferred stock dividends (1,034,844) (928,260) (3,033,444)
----------- ----------- ------------
Net loss available to common
stockholders $(4,871,964) $(6,516,172) $(49,628,759)
=========== =========== ============
Basic and diluted
net loss per share
available to common
stockholders $ (0.41) $ (0.61) $ (16.71)
Basic and diluted
weighted average common
shares outstanding 12,009,995 10,755,319 2,970,011
</TABLE>
See accompanying condensed notes to financial statements.
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months
Ended September 30,
2000 1999
Revenue:
SBIR contract revenue $ -- $ --
Expenses:
SBIR contract
research and
development -- --
Proprietary research
and development 204,851 334,446
General and
administrative 491,739 836,821
----------- -----------
Total operating expenses 696,590 1,171,267
----------- -----------
Loss from operations (696,590) (1,171,267)
Equity in losses from
joint ventures (622,850) (492,580)
Other Income -- --
Interest income 228,562 116,000
Interest expense (15,618) (12,820)
----------- -----------
Net loss (1,106,496) (1,560,667)
Preferred stock dividends (347,466) (309,910)
------------ -----------
Net loss available to common
stockholders $(1,453,962) $(1,870,577)
=========== ===========
Basic and diluted
net loss per share
available to common
stockholders $ (0.11) $ (0.17)
Basic and diluted
weighted average common
shares outstanding 12,741,858 10,755,319
See accompanying condensed notes to financial statements.
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Nine Months February 15, 1985
Ended September 30, (date of inception)
2000 1999 to September 30, 2000
<S> <C> <C> <C>
Net cash used in operating
activities $(1,732,681) $(2,282,588) $(17,405,152)
----------- ----------- ------------
INVESTING ACTIVITIES:
Patent issuance cost (68,795) (129,181) (745,308)
Investment in joint ventures (1,329,755) (1,626,826) (21,293,638)
Organizational costs
incurred -- -- (135)
Purchases of leasehold
improvements -- -- (695,613)
Purchases of office and
lab equipment (52,236) (125,518) (963,512)
Proceeds from
Assets sold -- -- 4,790
Purchases of marketable
Securities - available for
sale (4,967,596) (4,095,000) (10,580,695)
Proceeds from sale of marketable
securities - available for
sale 5,500,000 2,045,000 7,675,496
----------- ----------- ------------
Net cash used in
investing activities ( 918,382) (3,931,525) (26,598,615)
----------- ----------- ------------
FINANCING ACTIVITIES:
Net proceeds from issuance
of common stock, net of costs 7,791,239 -- 37,815,961
Net proceeds from issuance
of preferred stock -- -- 16,325,712
Proceeds from exercise
of options 215,888 -- 417,226
Proceeds from borrowings
under line of credit 77,193 95,774 1,228,106
Repayment of borrowings
under line of credit (121,116) (69,564) (879,788)
Proceeds from notes
payable 53,706 342,300
Repayments on notes
payable (23,521) (342,300)
Repayment of long-
term note receivable -- -- 50,315
Repayment of note
payable issued in
exchange for legal
service -- -- (71,968)
Purchase and retirement
of common stock -- -- (130,000)
Purchase of treasury stock -- -- (443,750)
----------- ----------- ------------
Net cash provided by
financing activities 7,963,204 56,395 54,311,814
----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents 5,312,141 (6,157,718) 10,308,047
Cash and cash equivalents at
beginning of periods 4,995,906 12,202,415 --
----------- ----------- ------------
Cash and cash equivalents at
end of periods $10,308,047 $ 6,044,697 $ 10,308,047
=========== =========== ============
</TABLE>
See accompanying condensed notes to financial statements.
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO FINANCIAL STATEMENTS
We prepared these unaudited interim consolidated financial statements under
the rules and regulations for reporting on Form 10-QSB. Accordingly, we omitted
some information and footnote disclosures normally accompanying the annual
financial statements. You should read these interim financial statements and
notes in conjunction with the consolidated financial statements and their notes
included in our latest annual report on Form 10-KSB. It is our opinion that the
consolidated financial statements include all adjustments necessary for a fair
statement of the results of operations, financial position and cash flows for
the interim periods. All adjustments were of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of the
results for the full fiscal year.
NET LOSS PER SHARE
Net loss per share is presented on the Consolidated Statements of Operations in
accordance with SFAS No. 128 for the current and prior periods. Endorex had a
net loss for all periods being presented, which resulted in diluted and basic
earnings per share being the same for all periods presented. The potential
impact of warrants and stock options outstanding was not included in the
calculation because their inclusion would have been anti-dilutive.
JOINT VENTURE ESTIMATES
The preparation of the quarterly consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
related to the activities of InnoVaccines Corporation ("InnoVaccines") and
Endorex Newco, Ltd. ("Newco"), our joint ventures with Elan Corporation, plc
("Elan"), including the reported net liabilities related to the joint ventures
and the reported amounts of equity in losses from joint ventures. Actual results
could differ from those estimates.
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR UNCONSOLIDATED JOINT VENTURES
Condensed, unaudited financial statement information of the joint ventures is
stated below. The joint ventures had no revenues. Net expenses equaled the net
loss for all periods.
For the Nine Months Ended
September 30,
2000 1999
----------- -----------
InnoVaccines, net of Endorex mark up on
billings to InnoVaccines.................. $(2,890,170) $(3,085,690)
Newco, net of Endorex mark up on billings
to Newco.................................. (243,723) -
----------- -----------
Total net loss............................. $(3,133,893) $(3,085,690)
=========== ===========
Reconciliation to equity in losses from
joint ventures:
Total joint venture net losses............. $(3,133,893) $(3,085,690)
Less: Elan minority interest............... 932,188 1,101,259
----------- -----------
Equity in losses from joint ventures....... $(2,201,705) $(1,984,431)
=========== ===========
<PAGE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2000
financial statement presentation. The reclassifications did not impact
previously reported net loss or deficit accumulated during the development
stage.
COMMON STOCK PRIVATE PLACEMENT
On April 12, 2000, we completed a private placement of common stock and warrants
with domestic and foreign institutional investors. Gross proceeds were
approximately $8.6 million. The private placement consisted of approximately
1.81 million newly issued common shares priced at $4.725 per share and warrants
to purchase 452,383 common shares at $5.91 per share. These warrants are
immediately exercisable and expire in April 2005. In partial consideration for
its services in assisting us through the capital raising process, Paramount
Capital, Inc. received warrants to purchase 226,190 common shares at $5.25 per
share. These warrants became exercisable on October 12, 2000, expire in October
2007, and the warrants may be called if the closing bid price of our common
stock has equaled or exceeded $13.125 per share for at least 20 consecutive
trading days. We intend to use the approximately $7.8 million net proceeds of
this financing to fund the development of our drug delivery technologies, to
continue our clinical development efforts, and for other general corporate
purposes.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion provides information to explain our results of
operations and financial condition. You should also read our unaudited
consolidated interim financial statements and their notes and our Annual Report
on Form 10-KSB. This report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, and is subject to the
safe-harbors created by those sections. These forward-looking statements are
subject to significant risks and uncertainties, including those identified in
Exhibit 99 "Risk Factors" of this Form 10-QSB, which may cause actual results to
differ materially from those discussed in any forward-looking statements. The
forward-looking statements within this Form 10-QSB are identified by words such
as "believes," "anticipates," "expects," "intends," "may," "will" "plans" and
other similar expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer to
expectations, projections, or other characterizations of future events or
circumstances are forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to forward-looking statements that
may be made to reflect events or circumstances occurring subsequent to the
filing of this Form 10-QSB with the SEC. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the SEC that attempt to advise interested parties of the risks and
factors that may affect our business.
<PAGE>
Endorex is a development stage enterprise and expects no significant revenue
from the sale of products in the near future.
Material Changes in Results of Operations
For the three-month period ended September 30, 2000, net loss decreased
approximately $0.5 million, or 29%, to $1.1 million as compared to a loss of
$1.6 million for the three months ended September 30, 1999. After giving effect
to dividends on preferred stock, which are paid in additional preferred shares,
net loss available to common stockholders decreased approximately $0.4 million,
or 22%, to $1.5 million, or $0.11 per share, compared with $1.9 million, or
$0.17 per share, for the prior year period. Net loss decreased due primarily to
greater interest income, the reduction in expenses related to the company's
oncology program and to lower levels of general and administrative expenses.
These reductions were partially offset by higher equity losses in joint
ventures.
Proprietary research and development expenditures for the three months ended
September 30, 2000 decreased approximately $0.1 million, or 39%, compared with
$0.3 million for the corresponding period ended September 30, 1999. On March 1,
2000 we announced our decision to divest our oncology business. As a result,
there was a reduction in spending on cancer-related programs during the third
quarter of 2000 versus 1999, although spending for drug delivery programs
increased during this period.
General and administrative expenses for the three months ended September 30,
2000 decreased $0.3 million, or 41%, to $0.5 million as compared to the three
months ended September 30, 1999. During the third quarter of 1999 general and
administrative expense included approximately $0.4 million of amortization of
the cost of financial advisory warrants issued in association with capital
raising transactions in 1997. These warrants were fully amortized as of the
beginning of 2000, resulting in a decrease in general and administrative
expenses during 2000.
We have two joint ventures with Elan. InnoVaccines is developing the Orasome(TM)
delivery system for oral and mucosal vaccines. Newco is developing Elan's
Medipad(R) drug delivery system, which consists of a small, disposable drug
delivery system that combines a microinfusion pump with the convenience of patch
technology, for the delivery of iron chelation drugs. Our share of research and
development expenditures through these joint ventures is recorded as equity in
losses from joint ventures. During the third quarter of 2000, equity in losses
from joint venture activities increased by approximately $0.1 million, or 26%,
to $0.6 compared to the same period of 1999. The increase was due to increased
spending in both the MEDIPAD(R)/iron chelator and Orasome(TM) development
initiatives.
Interest income for the third quarter of 2000 increased by approximately
$113,000 to $229,000, due to the effect of increased investment funds arising
from the April 2000 equity financing.
On September 30, 2000 Endorex and a subsidiary entered into an agreement with an
undisclosed third party whereby that third party purchased for a non-refundable
$250,000 an option to acquire one of our cancer products and related assets,
including intellectual property. The terms and price of option exercise have
been negotiated. This option payment will be recognized as income when
additional clinical data have been received by the third party, per the terms of
the agreement. We anticipate the delivery of the required data and the third
party's decision regarding the exercise of this option to occur prior to the end
of the calendar year.
<PAGE>
Net loss for the nine months ended September 30, 2000 decreased approximately
$1.8 million, or 31%, to $3.8 million as compared to a loss of $5.6 million for
the nine months ended September 30, 1999. Net loss available to common
stockholders, which reflects preferred dividends, decreased approximately $1.6
million, or 25%, to $4.9 million, or $0.41 per share, compared with $6.5
million, or $0.61 per share, for the prior year period.
The lower level of net loss through the third quarter of 2000 stemmed from
reductions in proprietary research and development expenditures (primarily in
oncology development), accompanied by lower general and administrative expenses
due primarily to decreased amortization of financial advisory warrants. These
expense reductions were partially offset by increased equity in losses in joint
ventures, reflecting higher levels of spending by Endorex and Elan on behalf of
InnoVaccines and Newco.
Proprietary research and development expenditures for the nine months ended
September 30, 2000 decreased approximately $0.7 million, or 50%, to $0.7 million
as compared to the corresponding period ended September 30, 1999. The decline in
proprietary research and development expense represents reduced spending on
oncology product development partially offset by higher spending on other
proprietary programs.
General and administrative expenses for the nine months ended September 30, 2000
decreased approximately $1.1 million, or 43%, to $1.5 million, as compared to
the nine months ended September 30, 1999. Substantially all the decline is
related to the reduced costs of amortizing financial advisory warrants issued in
association with capital raising transactions in 1997.
For the nine months ended September 30, 2000, equity losses from joint ventures
increased by approximately $0.2 million, or 11%, to $2.2 million as research and
development expenditures for both InnoVaccines and Newco increased over the
levels for the nine months ended September 30, 1999.
Interest income for the nine months ended September 30, 2000 increased
approximately $180,000, to $0.5 million as compared to the nine months ended
September 30, 1999. This difference was attributable to higher interest rates on
investments and increased investment balances from the net proceeds of equity
issued in April of 2000.
Endorex has hired Steve J. Koulogeorge as Controller/Assistant Treasurer. Mr.
Koulogeorge has an MBA from DePaul University and a B.S. in Finance from Drake
University. He is also a Certified Public Account in the State of Illinois.
Prior to joining Endorex, he spent approximately six years in accounting
positions with Kraft General Foods, eight years in progressively responsible
financial and accounting positions at Kraft/Alliant Foodservice Corp., and
approximately five years in financial reporting and control positions with
Illinois Tool Works.
Plan of Operation and Financial Condition
Endorex intends to continue to progress preclinical development of the
Orasome/TM/ delivery system for the oral and nasal delivery of proteins and
peptides, including hormones. Under our research and option agreement with Novo
Nordisk, we expect to continue to evaluate the Orasome/TM/ system for delivery
of Norditropin(R), Novo Nordisk's brand of human growth hormone, in preparation
for animal trials anticipated to begin in the fourth quarter of 2000. Based in
<PAGE>
part on the results of the animal trials, Novo Nordisk is expected to determine
whether to license our Orasome(TM) technology.
Endorex anticipates that InnoVaccines will continue efforts to develop prototype
oral and nasal tetanus, hepatitis B and flu vaccines, evaluate them in animal
models, and prepare for scale up activities that would be necessary to begin
clinical trials. In addition to its activities using the Orasome(TM) technology,
some of this vaccine research and development will occur under a program
initiated with the Southern Research Institute (SRI) using a delivery system
licensed from SRI in 1999. Additionally, InnoVaccines expects to continue
screening and testing new ligands for use in targeting Orasomal-based oral or
nasal vaccines to key sites in the mucosal tract. In conjunction with
Schein Pharmaceutical, which was recently acquired by Watson Laboratories, Newco
expects to continue its efforts to meet regulatory approvals required prior to
commercialization of its Medipad(R)/iron chelator product in the U.S. Newco
also expects to continue discussions underway with several companies regarding
marketing this product in key international markets.
On September 30, 2000 and December 31, 1999, we had cash, cash equivalents, and
marketable securities of approximately $13.3 million and $8.5 million,
respectively, and working capital of approximately $11.4 million and $6.9
million, respectively. Included in current assets as of September 30, 2000 is a
$250,000 receivable that represents the deferred income from our sale of an
option to acquire one of our oncology products.
Our current level of activities requires the expenditure of approximately
$400,000 per month, including costs associated with the joint ventures. We
believe that our current cash resources will be sufficient to support currently
planned operations for the next two years. However, we intend, from time to time
in the future, to seek to expand our research and development activities into
other technologies and/or products that we either may license from other persons
or develop. Any such activities may require the expenditure of funds not
presently available and may deplete our cash resources sooner than anticipated.
We also may seek to obtain funds from possible future public or private sales of
our securities or other sources. See Exhibit 99--"Risk Factors."
In April 2000, we completed a private placement that raised gross proceeds of
approximately $8.6 million. We intend to use the $7.8 million net proceeds of
this financing to fund the development of our drug delivery technologies, to
continue our clinical development efforts, and for other general corporate
purposes. From April 2000 through September 30, 2000, we have used approximately
$1.8 million to fund research and development, including capital improvements
and equipment, and operations.
PART II. - OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES
Pursuant to a private placement under Rule 506 of the Securities Act of 1933, as
amended, on April 12, 2000 we issued to investors an aggregate of approximately
1.81 million shares of our common stock and warrants to purchase 452,383 shares
of our common stock. The warrants issued to these investors are immediately
exercisable at $5.91 per share and expire in April 2005. The gross proceeds of
the private placement were approximately $8.6 million and the net proceeds were
approximately $7.8 million. As part of the compensation received by Paramount
Capital, Inc. for its assistance in the private placement, Paramount Capital,
Inc. received warrants to purchase 226,190 shares of our common stock. These
warrants issued to Paramount Capital, Inc. expire in October 2007.
<PAGE>
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 Financial Data Schedule
99.1 Risk Factors
____________________
b) Reports on Form 8-K: A current report on Form 8-K was filed with the
Securities and Exchange Commission by Endorex on November 9/th/, 2000 to report
the dismissal of PricewaterhouseCoopers LLP and engagement of Ernst and Young
LLP, Endorex's new independent public accountant.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENDOREX CORPORATION
November 13, 2000 /s/ Michael S. Rosen
--------------------
Michael S. Rosen
President and Chief Executive Officer
(principal executive officer)
/s/ Frank C. Reid
November 13, 2000 Frank C. Reid
Vice President, Finance and Corporate Development
(principal financial and accounting officer)